Debits and Credits in Accounts
Debits and credits are the building blocks of the double entry accounting system. Many accounting students find the usage of these words confusing. Many try to understand them by trying to draw an analogy with something they already know like plus and minus. However, debits and credits are distinctly different from plus and minus. Sometimes a debit entry may make an account balance go up whereas other times it will make an account balance go down. Lets try and understand how this debit and credit system works.
The debit credit system can be understood to be a two layered system. The steps involved in deciding whether an account needs to be debited or credited are as follows:
Ascertaining the Type of Account
Accounts are of two types the debit and the credit types. Here is how they are distinguished
When you debit an account which has a default debit balance, you increase its value. When you credit an account which has a default debit balance, you decrease its value. The same is true for credit accounts as well.
Ascertain the Type of Transaction
Now you can decide whether to debit or credit an account. Lets say you have to increase the cash balance. Cash is an asset and therefore has a default debit balance. When you debit it further, you increase its balance. Therefore, you will debit the cash account.
Similarly you can ascertain whether an item needs to be debited or credited. As a check, you must ensure that the debits in every transaction are equal to the credits. This is like the fundamental principle of accounting.
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